Definition of Accounting

o Accounting is a service activity. Its function is

to provide quantitative information, primarily
financial in nature, about economic entities,
that is intended to be useful in making
economic decision. (SFAS #1)
o Accounting is the art or recording, classifying
and summarizing in a significant manner and in
terms of money, transactions and events which
are in part at least of a financial character and
interpreting the results thereof. (AICPA)
o Accounting is the process of identifying,
measuring and communicating economic
information to permit informed judgment and
decision by users of the information. (AAA)
Accounting (AAA)
o Identifying

Recognition of accountable or non

accountable event.
1) Internal
2) External
o Measuring Assigning of peso amounts to
accountable events
o Communicating

Recording

Classifying

Summarizing
Prohibition in the Practice of Accountancy
o No person shall practice accountancy in this
country, or use the title "Certified Public
Accountant", or use the abbreviated title "CPA"
or display or use any title, sign, card,
advertisement or other device to indicate such
person practices or offers to practice
accountancy, or is a certified public
accountant, unless such person shall have
received from the Board a certificate of
registration/Professional license and be issued
a professional identification card or a valid
temporary/special permit duly issued to
him/her by the Board and the Commission.
(Section 26, R.A. 9298)
Qualifications of Applicant for Examinations
o Any person applying for examination shall
establish the following requisites to the
satisfaction of the Board that he/she:
1) Filipino citizen;
2) Good moral character;
3) Holder of the degree of Bachelor of
Science in Accountancy conferred by the
school, college, academy or institute duly
recognized and/or accredited by the CHED
or other authorized government offices;
and
4) Not been convicted of any criminal
offence involving moral turpitude.
Scope of Examination
o The licensure examination for certified public
accountants shall cover, but are not limited to,
the following subjects:
1) Theory of Accounts

2)
3)
4)
5)
6)
7)

Business Law and Taxation

Management Services
Auditing Theory
Auditing Problems
Practical Accounting Problem I
Practical Accounting Problem II. (Section
15, R.A. 9298)
Rating in the Licensure Examination
o To be qualified as having passed the licensure
examination for accountants, a candidate must
obtain a general average of seventy five
percent (75%), with no grade lower than sixtyfive percent (65%) in any given subject. In the
event a candidate obtains the rating of
seventy-five percent (75%) and above in at
least a majority of subjects as provided for in
this Act, he/she shall receive a conditional
credit for the subjects passed: Provided, That a
candidate shall take an examination in the
remaining subjects within two (2) years from
preceding examination: Provided, further, That
if the candidate fails to obtain at least a
general average of seventy-five percent (75%)
and a rating of at least sixty-five percent (65%)
in each of the subjects reexamined, he/she
shall be considered as failed in the entire
examination. (Section 16, R.A. 9298)
Rating in the Licensure Examination
o To passed:
1) General average of 75% and above
2) No grade lower than 65%
o Conditional:

Does not meet both requirements to

passed but majority of the subjects has a
rating of 75% and above.
o Failed:

Does not meet both requirements to

passed and majority of the subjects has a
rating of less than 75%.
Scope of Practice
o The practice of accountancy shall include, but
not limited to, the following:
a) Practice of Public Accountancy
b) Practice in Commerce and Industry
c) Practice in Education/Academe
d) Practice in Government. (Section 4. R.A.
9298)
Accounting vs. Auditing
Accounting vs. Bookeeping
Accounting vs. Accountancy
Financial Accounting vs. Managerial
Accounting
Generally Accepted Accounting Principle
(GAAP)
o Generally accepted accounting principles
encompass the conventions, rules and
procedures necessary to define what accepted
accounting practice is.
o It represents the rules, procedures, practice
and standards followed in the preparation and
presentation of financial statements.
o Basis

Experience

Reason

Usage

Customs

Practical necessity
Framework for the Preparation and
Presentation of Financial Statements
o Scope
The Framework deals with:
a) the objective of financial statements;
b) the qualitative characteristics that
determine the usefulness of information in
financial statements;
c) the definition, recognition and
measurement of the elements from which
financial statements are constructed; and
d) Concepts of capital and capital
maintenance. (par 5)
o Scope

The Framework is concerned with general

purpose financial statements (hereafter
referred to as financial statements)
including consolidated financial
statements. (par 6)

The Framework applies to the financial

statements of all commercial, industrial
and business reporting entities, whether in
the public or the private sectors.

A reporting entity is an entity for which

there are users who rely on the financial
statements as their major source of
financial information about the entity. (par
8)
Complete set of financial statements
1) Balance sheet,
2) Income statement
3) Statement of changes in financial position
(which may be presented
4) Statement of cash flows or a statement of
funds flow
5) Notes and other statements and explanatory
material that are an integral part of the
financial statements.
6) It may include supplementary schedules and
information based on or derived from, and
expected to be read with, such statements.
Not included in the Financial statements
1) Reports by directors;
2) Statements by the chairman;
3) Discussion and analysis by management and
similar items that may be included in a
financial or annual report.
Users of financial statements
o Investors
o Employees
o Lenders.
o Suppliers and other trade creditors.
o Customers
o Governments and their agencies.
o Public.
The objective of financial statements
o The objective of financial statements is to
provide information about the financial

position, performance and changes in financial

position of an entity that is useful to a wide
range of users in making economic decisions.
(par 12)
o Financial statements prepared for this purpose
meet the common needs of most users.
However, financial statements do not provide
all the information that users may need to
make economic decisions since they largely
portray the financial effects of past events and
do not necessarily provide non-financial
information. (Par 13)
Financial position
1) Financial structure source of financing the
assets of the entity.
2) Liquidity availability of cash in a near future
to cover currently maturing obligations.
3) Solvency availability of cash over a long
term to meet financial commitments.
4) Capacity for adaptation - Its capacity to
adapt to changes in the environment in which
it operates. (par 16)
Underlying Assumptions
1) Accrual basis
The effects of transactions and other events
are recognized when they occur (and not as
cash or its equivalent is received or paid) and
they are recorded in the accounting records
and reported in the financial statements of the
periods to which they relate. (par 22)
2) Going concern
It is assumed that the entity has neither the
intention nor the need to liquidate or curtail
materially the scale of its operations; (par 23)
Four principal qualitative characteristics
1) Understandability
o It must be readily understandable by
users. For this purpose, users are
assumed to have a reasonable knowledge
of business and economic activities and
accounting and a willingness to study the
information with reasonable diligence.
However, information about complex
matters that should be included in the
financial statements because of its
relevance to the economic decisionmaking needs of users should not be
excluded merely on the grounds that it
may be too difficult for certain users to
understand. (Par 25)
2) Relevance
o Information has the quality of relevance
when it influences the economic decisions
of users by helping them evaluate past,
present or future events or confirming, or
correcting, their past evaluations. (Par 26)
o Ingredients of relevance
a) Predictive value Help users
increase the likelihood of correctly or
accurately predicting or forecasting
outcome of events.

b) Feedback Value To confirm or

correct earlier expectations.
c) Timeliness Providing information to
the decision maker while it has the
capacity to affect a decision.
o The relevance of information is affected
by its nature and materiality. (Par 29)
3) Reliability
Old

Accounting
Standards
Council

Materiality
o Information is material if its omission or
misstatement could influence the economic
decisions of users taken on the basis of the
financial statements. Materiality depends on
the size of the item or error judged in the
particular circumstances of its omission or
misstatement. Thus, materiality provides a
threshold or cut-off point rather than being a
primary qualitative characteristic which
information must have if it is to be useful. (Par
30)

Constraints on relevant and reliable

information
1. Timeliness
To provide information on a timely basis it may
often be necessary to report before all aspects
of a transaction or other event are known, thus
impairing reliability. Conversely, if reporting is
delayed until all aspects are known, the
information may be highly reliable but of little
use to users who have had to make decisions
in the interim. (Par 43)
2. Balance between benefit and cost
The balance between benefit and cost is a
pervasive constraint rather than a qualitative
characteristic. The benefits derived from
information should exceed the cost of providing
it. (Par 44) In practice a balancing, or trade-off,
between qualitative characteristics is often
necessary. Generally the aim is to achieve an
appropriate balance among the characteristics
in order to meet the objective of financial
statements. The relative importance of the
characteristics in different cases is a matter of
professional judgments. (Par 45)
The elements of financial statements
o Financial position
The elements directly related to the
measurement of financial position are assets,
liabilities and equity. These are defined as
follows:
a) An asset is a resource controlled by the
entity as a result of past events and from
which future economic benefits are
expected to flow to the entity.
b) A liability is a present obligation of the
entity arising from past events, the
settlement of which is expected to result in
an outflow from the entity of resources
embodying economic benefits.
c) Equity is the residual interest in the assets
of the entity after deducting all its
liabilities. (Par 49)
The elements of financial statements

New

Financial
Reporting
Standards
Council
(FRSC)
Interpretation o Philippine
Committee
Interpretation
(IC)
s Committee
(PIC)
Standing
o International
Interpretation
Financial
Committee
Reporting
(SIC)
Interpretation
s Committee
(IFRIC)
International
o International
Accounting
Accounting
Standards
Standards
Committee
Board (IASB)
o Faithful representation
o Substance over form
o Neutrality
o Prudence
o Completeness
4) Comparability
o Users must be able to compare the
financial statements of an entity through
time in order to identify trends in its
financial position and performance. Users
must also be able to compare the financial
statements of different entities in order to
evaluate their relative financial position,
performance and changes in financial
position. (Par 39)
o It informed users of the accounting
policies employed in the preparation of
the financial statements, any changes in
those policies and the effects of such
changes. (Par 40)
o The need for comparability should not be
confused with mere uniformity and should
not be allowed to become an impediment
to the introduction of improved accounting
standards. It is not appropriate for an
entity to continue accounting in the same
manner for a transaction or other event if
the policy adopted is not in keeping with
the qualitative characteristics of relevance
and reliability . It is also inappropriate for
an entity to leave its accounting policies

unchanged when more relevant and

reliable alternatives exist. (Par 41)
Financial Reporting Standards Council

Income - is increases in economic benefits

during the accounting period in the form of
inflows or enhancements of assets or
decreases of liabilities that result in increases
in equity, other than those relating to
contributions from equity participants.
o Expenses - are decreases in economic
benefits during the accounting period in the
form of outflows or depletions of assets or
incurrences of liabilities that result in decreases
in equity, other than those relating to
distributions to equity participants. (Par 70)
o Flow of Future economic benefits
1) Assets may be used singly or in
combination with other assets in the
production of goods or services to be sold
by the entity;
2) Assets may be exchanged for other assets;
3) Assets may be used to settle a liability; or
4) Assets may be distributed to the owners of
the entity. (Par 55)
Existence of Assets
o Physical form is not essential to the existence
of an asset. (i.e. patents and copyrights) par 56
o Receivables and property are associated with
legal rights, including the right of ownership.
However, in determining the existence of an
asset, the right of ownership is not essential.
(i.e. Finance lease) par 57
o the capacity of an entity to control benefits is
usually the result of legal rights, an item may
nonetheless satisfy the definition of an asset
even when there is no legal control. (i.e. knowhow obtained from a development activity, by
keeping that know-how secret) Par 57
o Entities normally obtain assets by purchasing
or producing them, but other transactions or
events may generate assets. (i.e. property
received by an entity from government as part
of a program to encourage economic growth in
an area and the discovery of mineral deposits)
par 58
o Transactions or events expected to occur in the
future do not in themselves give rise to assets.
(i.e. intention to purchase inventory) par 58
Liabilities
o An obligation is a duty or responsibility to act
or perform in a certain way. Obligations may be
legally enforceable as a consequence of a
binding contract or statutory requirement. (i.e
amounts payable for goods and services
received.)
o Obligations also arise, however, from normal
business practice, custom and a desire to
maintain good business relations or act in an
equitable manner. (i.e. policy to rectify faults in
its products even when these become apparent
after the warranty period has expired)(par 60)
o A distinction needs to be drawn between a
present obligation and a future commitment. A
decision by the management of an entity to
o

acquire assets in the future does not, of itself,

give rise to a present obligation. An obligation
normally arises only when the asset is
delivered or the entity enters into an
irrevocable agreement to acquire the asset. In
the latter case, the irrevocable nature of the
agreement means that the economic
consequences of failing to honor the obligation,
for example, because of the existence of a
substantial penalty, leave the entity with little,
if any, discretion to avoid the outflow of
resources to another party. (Par 61)
o Settlement of obligation
The settlement of a present obligation usually
involves the entity giving up resources
embodying economic benefits in order to
satisfy the claim of the other party. Such as:
a) payment of cash;
b) transfer of other assets;
c) provision of services;
d) replacement of that obligation with another
obligation; or
e) Conversion of the obligation to equity.
f) An obligation may also be extinguished by
other means, such as a creditor waiving or
forfeiting its rights. (Par 62)
Equity
o Equity is the residual interest in the assets of
the entity after deducting all its liabilities
Performance
o Profit is frequently used as a measure of
performance or as the basis for other
measures, such as return on investment or
earnings per share. The elements directly
related to the measurement of profit are
income and expenses. The recognition and
measurement of income and expenses, and
hence profit, depends in part on the concepts
of capital and capital maintenance used by the
entity in preparing its financial statements.
(par 69)
Income
o Income = revenue + gains
o Revenue - arises in the course of the ordinary
activities of an entity and is referred to by a
variety of different names including sales, fees,
interest, dividends, royalties and rent. (Par 70)
Expenses
o Application of matching principle.

Cause and effect association (i.e cost of

sales)

Systematic and rational allocation (i.e.

Depreciation, amortization, allocation of
prepayment and deferred charges)

Immediate recognition. (i.e. salaries, and

most administrative expense, advertising
and most selling expenses, loss from
disposal of building, loss from sale of
investment)
Recognition of elements

1) Asset recognition principle

o An asset is recognized in the balance
sheet when it is probable that the future
economic benefits will flow to the entity
and the asset has a cost or value that can
be measured reliably. (Par 89)
o An asset is not recognized in the balance
sheet when expenditure has been incurred
for which it is considered improbable that
economic benefits will flow to the entity
beyond the current accounting period.
Instead such a transaction results in the
recognition of an expense in the income
statement. This treatment does not imply
either that the intention of management
in incurring expenditure was other than to
generate future economic benefits for the
entity or that management was
misguided. The only implication is that the
degree of certainty that economic benefits
will flow to the entity beyond the current
accounting period is insufficient to warrant
the recognition of an asset. (Par 90)
2) Liability recognition principle
o A liability is recognized in the balance
sheet when it is probable that an outflow
of resources embodying economic
benefits will result from the settlement of
a present obligation and the amount at
which the settlement will take place can
be measured reliably. In practice,
obligations under contracts that are
equally proportionately unperformed (for
example, liabilities for inventory ordered
but not yet received) are generally not
recognized as liabilities in the financial
statements. However, such obligations
may meet the definition of liabilities and,
provided the recognition criteria are met
in the particular circumstances, may
qualify for recognition. In such
circumstances, recognition of liabilities
entails recognition of related assets or
expenses. (par 91)
3) Income recognition principle
o Income is recognized in the income
statement when an increase in future
economic benefits related to an increase
in an asset or a decrease of a liability has
arisen that can be measured reliably. This
means, in effect, that recognition of
income occurs simultaneously with the
recognition of increases in assets or
decreases in liabilities (for example, the
net increase in assets arising on a sale of
goods or services or the decrease in
liabilities arising from the waiver of a debt
payable). (par 92)
4) Expense recognition principle
Recognition of elements

An item that meets the definition of an element

should be recognized if:
a) it is probable that any future economic
benefit associated with the item will flow to
or from the entity; and
b) The item has a cost or value that can be
measured with reliability.
Sale of goods
o Revenue from the sale of goods shall be
recognized when all the following
conditions have been satisfied:
a) the entity has transferred to the buyer the
significant risks and rewards of ownership
of the goods;
b) the entity retains neither continuing
managerial involvement to the degree
usually associated with ownership nor
effective control over the goods sold;
c) the amount of revenue can be measured
reliably;
d) it is probable that the economic benefits
associated with the transaction will flow to
the entity; and the costs incurred or to be
incurred in respect of the transaction can
be measured reliably. (PAS 18, par 14)
Exception
1) Installment method
2) Cost recovery method or sunk cost method
3) Cash Method
4) Percentage of completion
5) Production method
Rendering of services
o Condition for the recognition of revenue from
rendering of services:
a) the amount of revenue can be measured
reliably;
b) it is probable that the economic benefits
associated with the transaction will flow to
the entity;
c) the stage of completion of the transaction
at the end of the reporting period can be
measured reliably; and
d) the costs incurred for the transaction and
the costs to complete the transaction can
be measured reliably. (PAS 18, par 20)
Interest, royalties and dividends
o Revenue shall be recognized on the following
bases:
a) interest shall be recognized on a time
proportion basis that takes into account the
effective yield on the assets.
b) royalties shall be recognized on an accrual
basis in accordance with the substance of
the relevant agreement; and
c) Dividends shall be recognized when the
shareholders right to receive payment is
established. (PAS 18, par 30)
Other income recognition
1) Installation fees are recognized as revenue
over the period of installation by reference to
the stage of completion.
o

2) Subscription revenue should be recognized on

a straight line basis over the subscription
period.
3) Admission fees are recognized as revenue
when the event takes place
4) Tuition fees are recognized as revenue over the
period in which tuition is provided.
Recognition of expenses
o Expenses are recognized in the income
statement when a decrease in future economic
benefits related to a decrease in an asset or an
increase of a liability has arisen that can be
measured reliably. This means, in effect, that
recognition of expenses occurs simultaneously
with the recognition of an increase in liabilities
or a decrease in assets (for example, the
accrual of employee entitlements or the
depreciation of equipment). (Par 94)
Measurement of the elements of financial
statements
o A number of different measurement bases are
employed to different degrees and
o In varying combinations in financial
statements. They include the following:
a) Historical cost. Assets are recorded at the
amount of cash or cash equivalents paid or
the fair value of the consideration given to
acquire them at the time of their acquisition.
Liabilities are recorded at the amount of
proceeds received in exchange for the
obligation, or in some circumstances (for
example, income taxes), at the amounts of
cash or cash equivalents expected to be
paid to satisfy the liability in the normal
course of business.
b) Current cost. Assets are carried at the
amount of cash or cash equivalents that
would have to be paid if the same or an
equivalent asset was acquired currently.
Liabilities are carried at the undiscounted
amount of cash or cash equivalents that
would be required to settle the obligation
currently.

c)

Realizable (settlement) value. Assets are

carried at the amount of cash or cash
equivalents that could currently be obtained
by selling the asset in an orderly disposal.
Liabilities are carried at their settlement
values; that is, the undiscounted amounts of
cash or cash equivalents expected to be
paid to satisfy the liabilities in the normal
course of business.
d) Present value. Assets are carried at the
present discounted value of the future net
cash inflows that the item is expected to
generate in the normal course of business.
Liabilities are carried at the present
discounted value of the future net cash
outflows that are expected to be required to
settle the liabilities in the normal course of
business.
Capital maintenance:
a) Financial capital maintenance. Under this
concept a profit is earned only if the financial
(or money) amount of the net assets at the
end of the period exceeds the financial (or
money) amount of net assets at the beginning
of the period, after excluding any distributions
to, and contributions from, owners during the
period. Financial capital maintenance can be
measured in either nominal monetary units or
units of constant purchasing power.
b) Physical capital maintenance. Under this
concept a profit is earned only if the physical
productive capacity (or operating capability)
of the entity (or the resources or funds needed
to achieve that capacity) at the end of the
period exceeds the physical productive
capacity at the beginning of the period, after
excluding any distributions to, and
contributions from, owners during the period.